455 Bravo Uniform
Final Approach
Question for you guys that are in a partnership or equity club with a loan on the plane: does/did the bank ask for a personal guarantee? If so, did one person or multiple people sign the bank note?
Airplane LLC and loan
- Thread starter 455 Bravo Uniform
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The bank will want someone responsible and financially sound on the hook. The LLC isn't going to be able to get a loan, it's members will have to get for the loan, then give the money from the loan to the LLC, and the LLC buys the airplane.
airdale
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airdale
Worse, assuming multiple people are willing to sign, the bank will probably insist on "joint and several" liability. This means that if the loan goes sour, they can pick the target that they think has the biggest wallet and try to collect from him. They don't have to go after everybody in shares.
IMO they will be willing to have the LLC on the paperwork as the debtor but they will rely on the guarantee as their real collateral. I don't think many bank workout departments will willingly repo an airplane. They don't have the expertise.
IMO they will be willing to have the LLC on the paperwork as the debtor but they will rely on the guarantee as their real collateral. I don't think many bank workout departments will willingly repo an airplane. They don't have the expertise.
ChemGuy
Cleared for Takeoff
when I was looking to refi our partnership owned plane places seemed ok loaning to the llc. the 4 of us would be required to have credit run and sign personal guarantees. if one of us left/sold the bank wanted to run credit and add the new guy to the loan, new guarantee, etc.
I sold before we got to that point so I don't know if they ever did it. sounded like it was something the AC lenders had done before.
I sold before we got to that point so I don't know if they ever did it. sounded like it was something the AC lenders had done before.
455 Bravo Uniform
Final Approach
Thanks.
Since I can't find a nearby club or the plane I want to rent, was considering purchasing the plane and starting a club or partnership.
Was not sure if it would be beneficial to buy it outright myself, then when a partner is found to roll them into the loan paperwork. Also wondered if I could buy (100% cash), then sell to the LLC (me and partners signing the loan).
Since I can't find a nearby club or the plane I want to rent, was considering purchasing the plane and starting a club or partnership.
Was not sure if it would be beneficial to buy it outright myself, then when a partner is found to roll them into the loan paperwork. Also wondered if I could buy (100% cash), then sell to the LLC (me and partners signing the loan).
denverpilot
Tied Down
You got the answer on the personal guarantees and what not.
You can do it the other way you mentioned, just think carefully about the wording of an agreement between you and the LLC as a separate entity that has the use of your airplane.
We used to have a loan on our 182 inside the LLC. The co-owner that left actually held it, and we had various paperwork showing how he was holding the note, the airplane was being held by the LLC, and the responsibilities of all parties to each other, and signed all of that and notarized it all. We also had operating rules for the aircraft inside the LLC that everyone agreed to and signed.
With him having just left, and really the only reason for the note was a cash flow and him wanting to write a single check monthly for a family "thing" that only affected him, the remaining two of us decided to pay off the note and set up all new agreements for the LLC owning the airplane, we own the shares, and what happens if one of us decides to leave if we can't negotiate something we both like, etc. We've also discussed what happens if one of us dies, and similar to a real profit making business, we even discussed whether either of us wants the other to hold back or have life insurance to cover a dissolution caused by death. You have to decide what level of detail you're comfortable with in the agreement, but more is usually better.
Job loss?
Death?
Death IN the aircraft?
Gets mad at something and refuses to pay the bills?
Willfully damaging the airplane?
High number of careless accidents damaging the airplane?
Operating the airplane outside of the agreed LLC rules, or FARs?
Etc... the list can be as long or short as you like.
We generally get along and talk about this stuff in front of "witnesses", our wives, so we don't have a huge list... and we have talked to them and THEY agree on the death plan... so not all of ours is in writing. That's all about how comfortable you feel with or without it written down and your take on the integrity and ethics of your co-owner(s).
At least have the discussion, though. Think through a few "oh crap!" scenarios and have a plan, just like flying.
With us down to two right now, one of us deciding to push up daisies means a 50% price jump on fixed costs immediately for the other, and decisions to be made about keep or sell. To keep, the right thing to do is to hand a large check to the widow. If you're not prepared to do that, it's best to let her know ahead of time. Just as an example. Maybe she'd take payments from the surviving co-owners toward the deceased co-owner's equity in the aircraft. Maybe she just wants it gone and doesn't care. Maybe she wants an immediate sale so the number is "correct".
There's a lot of things to think about in a co-ownership, but they're fairly obvious and can be discussed and hashed out to a general plan and important ones put in writing.
I've told the story here of a friend who had three people in a 182 and two were laid off in the same layoff right when the airplane needed an engine. The airplane sat unused in a hangar for three years, and they eventually decided to have the others pay him off by simply releasing any equity they had. He bought the airplane a new engine, had moved cities since the engine died, so moved the airplane closer to home, and flew it for another few years, and sold it. He says nobody left then deal feeling like it was unfair, only disappointed they couldn't get back to the good days and he lamented that he had to rent for three years while paying a hangar bill. Nobody ended up mad at anyone else, they just worked it out.
I've heard a FEW stories of stuff like that going the other way, with lawsuits and angry people but not nearly as many as those who just rolled with the punches. Know your personality types.
You can do it the other way you mentioned, just think carefully about the wording of an agreement between you and the LLC as a separate entity that has the use of your airplane.
We used to have a loan on our 182 inside the LLC. The co-owner that left actually held it, and we had various paperwork showing how he was holding the note, the airplane was being held by the LLC, and the responsibilities of all parties to each other, and signed all of that and notarized it all. We also had operating rules for the aircraft inside the LLC that everyone agreed to and signed.
With him having just left, and really the only reason for the note was a cash flow and him wanting to write a single check monthly for a family "thing" that only affected him, the remaining two of us decided to pay off the note and set up all new agreements for the LLC owning the airplane, we own the shares, and what happens if one of us decides to leave if we can't negotiate something we both like, etc. We've also discussed what happens if one of us dies, and similar to a real profit making business, we even discussed whether either of us wants the other to hold back or have life insurance to cover a dissolution caused by death. You have to decide what level of detail you're comfortable with in the agreement, but more is usually better.
Job loss?
Death?
Death IN the aircraft?
Gets mad at something and refuses to pay the bills?
Willfully damaging the airplane?
High number of careless accidents damaging the airplane?
Operating the airplane outside of the agreed LLC rules, or FARs?
Etc... the list can be as long or short as you like.
We generally get along and talk about this stuff in front of "witnesses", our wives, so we don't have a huge list... and we have talked to them and THEY agree on the death plan... so not all of ours is in writing. That's all about how comfortable you feel with or without it written down and your take on the integrity and ethics of your co-owner(s).
At least have the discussion, though. Think through a few "oh crap!" scenarios and have a plan, just like flying.
With us down to two right now, one of us deciding to push up daisies means a 50% price jump on fixed costs immediately for the other, and decisions to be made about keep or sell. To keep, the right thing to do is to hand a large check to the widow. If you're not prepared to do that, it's best to let her know ahead of time. Just as an example. Maybe she'd take payments from the surviving co-owners toward the deceased co-owner's equity in the aircraft. Maybe she just wants it gone and doesn't care. Maybe she wants an immediate sale so the number is "correct".
There's a lot of things to think about in a co-ownership, but they're fairly obvious and can be discussed and hashed out to a general plan and important ones put in writing.
I've told the story here of a friend who had three people in a 182 and two were laid off in the same layoff right when the airplane needed an engine. The airplane sat unused in a hangar for three years, and they eventually decided to have the others pay him off by simply releasing any equity they had. He bought the airplane a new engine, had moved cities since the engine died, so moved the airplane closer to home, and flew it for another few years, and sold it. He says nobody left then deal feeling like it was unfair, only disappointed they couldn't get back to the good days and he lamented that he had to rent for three years while paying a hangar bill. Nobody ended up mad at anyone else, they just worked it out.
I've heard a FEW stories of stuff like that going the other way, with lawsuits and angry people but not nearly as many as those who just rolled with the punches. Know your personality types.
midlifeflyer
Touchdown! Greaser!
It's something virtually every bank lender will do. So far, I haven't seen one that didn't.
A well-established club with multiple airplanes (some of which are paid off) may be able to get a loan without guarantees by providing ALL of the aircraft as collateral. I know of at least one situation like this. But for a "new" club, no way you find a lender willing to do it without a substantial down payment and personal guaranties.
denverpilot
Tied Down
The down payment thing is important to reiterate for anyone thinking of forming a club or co-ownership. Usually it's 20% and not negotiable with most lenders on a "toy" item like an aircraft where the aircraft is securing the loan.
Interestingly many lenders actually do use Vref which I find to almost always be higher than the actual aircraft value, but they have to pick something, and that's pretty much what they can all get, so it's in their SOP instructions. It can work in your favor. Haven't seen it work against anyone yet on anything reasonably valued for sale price.
texasag93
Line Up and Wait
Each member of our club (corporation really) signs a personal guarantee for $16,000 when they join the club. We currently each have about $8,000 in equity in the club (plane values minus loan balance).
There are 16 of us.
Some have deep pockets, some will never see $16,000 in their bank.
No one is responsible for a penny more than $16,000.
The bank is the lean holder, so they get paid first if metal is ever bent.
There are 16 of us.
Some have deep pockets, some will never see $16,000 in their bank.
No one is responsible for a penny more than $16,000.
The bank is the lean holder, so they get paid first if metal is ever bent.
texasag93
Line Up and Wait
I will also add that the IRS considers us a social club, so we are not taxed when we bring in more than we spend in a fiscal year. That has happened, but not on a regular basis.
We have been around since 1985.
We have been around since 1985.
midlifeflyer
Touchdown! Greaser!
It's probably more about being a well established club that has already created a solid credit history than about the collateral. Collateral is just in case. Payment is what really counts.
Possibly, but in our instance, the driving factor for the bank was the ample collateral.
midlifeflyer
Touchdown! Greaser!
Yeah it happens. I've seen banks burned looking at collateral rather than prospects for repayment.
Matthew K
Line Up and Wait
Not exactly the same probably but I've heard of scenarios like this- two people went in on a loan together, later down the road one guy defaults on some loans not even related to the one the two took out before, and the bank tried(and succeeded) to go after the other guy that had nothing to do with it because of the previous document they'd signed like over 5 years before on a loan they'd paid off.
I wanted to add a reply to this old thread because there's some info that's not necessarily true -- having gone through this with an LLC a few times now.
1. Everyone in your LLC has to qualify for the loan separately. You'll all be named on the loan but the bank looks at each member individually and says "Could John Doe qualify on their own and does the $1,000 monthly fit their DTI? Could Jane Doe qualify on their own? and does the $1,000 monthly fit their DTI?". Each person will need to submit their financials and get a credit check. My last partnership had three members. Each of us made well into the six figures and we were qualifying on a $90k loan. We had to produce the same paperwork as if we were buying a house. One member had a snag with some of their paperwork that almost sunk the loan for all of us. Fortunately, it all got sorted out. They didn't care that the other member and I still had a combined earnings of 4x the loan request. It also didn't matter that any one of us could go down to a dealership and finance a $90k car in about an hour. Aircraft loans are different.
2. You can't just add/delete people from your loan -- I'm not sure why people are even suggesting that. The only way to add/delete someone from a loan is to refinance. It's the same with your mortgage. You can't just add someone, you have to refi and get their name on it. Your aircraft loan is no different -- even if it's in the name of the LLC. Therefore, you need to really think hard about who you want on this journey with you and if they can afford it down the stretch. If they want to leave or you want to add more people, it's not that simple. If you owned the aircraft outright, then sure, super easy. Just amend the Operating Agreement and off you go. However, if you have a loan, it's much more difficult.
3. Banks will only loan 80-85% of the VREF or the purchase price, whichever is lower. In today's 2023 market, that's a real challenge. In a lot of cases, planes are VREF'ing way below what Sellers are asking. Additionally, VREF hasn't been super accurate lately. If you want to buy a $200k Bonanza and it's VREF is $160k. then the bank is only going to loan you 80% of that $160k VREF. That means you have to come up with the $72k gap.
1. Everyone in your LLC has to qualify for the loan separately. You'll all be named on the loan but the bank looks at each member individually and says "Could John Doe qualify on their own and does the $1,000 monthly fit their DTI? Could Jane Doe qualify on their own? and does the $1,000 monthly fit their DTI?". Each person will need to submit their financials and get a credit check. My last partnership had three members. Each of us made well into the six figures and we were qualifying on a $90k loan. We had to produce the same paperwork as if we were buying a house. One member had a snag with some of their paperwork that almost sunk the loan for all of us. Fortunately, it all got sorted out. They didn't care that the other member and I still had a combined earnings of 4x the loan request. It also didn't matter that any one of us could go down to a dealership and finance a $90k car in about an hour. Aircraft loans are different.
2. You can't just add/delete people from your loan -- I'm not sure why people are even suggesting that. The only way to add/delete someone from a loan is to refinance. It's the same with your mortgage. You can't just add someone, you have to refi and get their name on it. Your aircraft loan is no different -- even if it's in the name of the LLC. Therefore, you need to really think hard about who you want on this journey with you and if they can afford it down the stretch. If they want to leave or you want to add more people, it's not that simple. If you owned the aircraft outright, then sure, super easy. Just amend the Operating Agreement and off you go. However, if you have a loan, it's much more difficult.
3. Banks will only loan 80-85% of the VREF or the purchase price, whichever is lower. In today's 2023 market, that's a real challenge. In a lot of cases, planes are VREF'ing way below what Sellers are asking. Additionally, VREF hasn't been super accurate lately. If you want to buy a $200k Bonanza and it's VREF is $160k. then the bank is only going to loan you 80% of that $160k VREF. That means you have to come up with the $72k gap.
midlifeflyer
Touchdown! Greaser!
Did someone suggest #2? No, you can't Willy Nilly change co-borrowers or guarantors. But it may or may not require a full refinance.
#3 is "mostly." #1 is "it depends."
Nick Geber
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NIckG
It depends on the financial strength of your company and who you're getting the loan from.
455 Bravo Uniform
Final Approach
Wow, I forgot I started this thread. I ended up buying and keeping it all to myself. I got too much of my own DNA tied up in this flying contraption, not gonna share.
midlifeflyer
Touchdown! Greaser!
Of course.
kep5niner
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Pete
I hear that. I like the seat (and the Hobbs) right where I left it the last time I flew
I suck at sharing. Been working on that since pre-school.